Cheat Sheet

Contract Law For Dummies

To be successful in contract law, you need to know the rules and be able to analyze fact situations in the light of those rules. This Cheat Sheet introduces some of the most important concepts in contract law — such as contract formation, promises enforceable because of reliance and restitution, the statute of frauds, the parol evidence rule, and damages for breach of contract — and boils them down for easy reference.

Essential Elements of Contract Formation

A contract is a legally enforceable exchange of promises. Contract formation requires the following three essential ingredients:

Offer: The offeror promises the offeree something in exchange for the offeree’s promise to do or not to do something.

Acceptance: The offeree gives the offeror whatever was requested, such as a promise to do or not to do something.

Consideration: The consideration is whatever each party brings to the table in the bargained-for exchange.

Finding an Enforceable Obligation

If you’re faced with the question of contract formation in your legal dealings, take the following three steps to find the obligation in the parties’ interaction:

Look for a bargained-for contract — an exchange that has the three essential elements of offer, acceptance, and consideration.

Look for a claim based on reliance (also known as promissory estoppel), meaning that one party reasonably changed his position due to the other party’s promise and lost something as a result.

Look for a claim based on restitution, meaning that one party conferred a benefit on another without intending it as a gift or forcing it on the other party.

If you find at least one of these elements, you’re looking at an enforceable obligation.

Determining Whether a Transaction Is within the Statute of Frauds

To determine whether a transaction is within the statute of frauds and therefore must be evidenced by a writing, check whether the transaction is any of the following:

An agreement concerning real estate

An agreement to rent real property for longer than a year

An agreement that by its terms can’t be performed within a year from the making

An agreement to answer for the duty of another

An agreement for the sale of goods for $500 or more

If an agreement is within the statute, look for evidence of a writing signed by the person against whom enforcement is sought. If you don’t find a sufficient writing, look for an exception to the statute.

Extrinsic Evidence: Grasping the Parol Evidence Rule

Parol evidence is evidence of terms or understandings extrinsic to (not included in) a written contract. Courts follow the parol evidence rule to determine whether the evidence is admissible. Here’s the rule itself:

Once the parties have reduced their agreement to a writing that they intend to contain the final and complete statement of their agreement, then evidence of terms that would supplement or contradict it are not admissible.

And here’s how to apply the rule:

Determine whether the parties intended the writing to be final.

If yes, evidence may be offered to supplement the writing but not to contradict it. If no, evidence may be offered to supplement or contradict the writing.

Determine whether the parties intended the writing to be complete as well as final.

If yes, evidence may not be offered to contradict or supplement the writing. If no, evidence may be offered to supplement the writing but not to contradict it.

Limitations to Damages from Breach of Contract

The plaintiff in a breach of contract case faces an uphill battle in proving the case. Any damages the court awards are limited by the following considerations:

Causation: The plaintiff must prove that the breach caused the loss.

Certainty: The plaintiff must prove the amount of damages to a reasonable certainty.

Foreseeability (the Hadley rule): The plaintiff can recover only the losses that the defendant, at the time the parties made the contract, would reasonably have known would result from the breach.

Mitigation: The plaintiff must make reasonable efforts to minimize the cost of the breach.

Checking for Contract Conditions

In contract law, a condition is an event that must occur before some performance is due. Parties may claim that they aren’t in breach of contract because the condition that had to occur before they had to perform hasn’t occurred. A condition can be express or implied:

Express: An express condition, which usually uses words like if, is stated in the contract.

Implied: An implied condition is found by the court. The most common implied condition is the performance of a party. Thus, a party may claim that it doesn’t have to perform because the other party didn’t perform.